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Like many Canadians, you’re probably wondering what the Tax-Free Savings Account (TFSA) is about.
According to the Canada Revenue Agency, over 15 million Canadians have a TFSA account. And every year, more Canadians are taking advantage of TFSAs to grow their savings and accumulate wealth.
“You can think of a TFSA as a tax-free account, where you can hold savings, GICs, and a number of other investments,” explains David MacRae, Director of Wealth & Advisory Services at Cambrian.
You can use a TFSA for a short-term goal, such as saving for a family vacation, or a long-term goal, like a down payment for your home.
But how does a TFSA work? We’re diving into how you can use this tax-advantaged account to grow your savings and reach your financial goals:
TFSAs were introduced by the Government of Canada in 2009. They’re designed to help Canadians increase their savings without taxing the investment growth earned in that account.
With a TFSA, you can invest money you hold inside the account. Then, any income you generate from investments in your TFSA will not be taxed. On top of that, you won’t be taxed for withdrawing the money.
Any residents of Canada who are at least 18 years old and have a social insurance number (SIN) can set aside money in a TFSA.
The annual TFSA contribution limit is set by the Government of Canada, and it can change each year. For 2024, the TFSA contribution limit is $7,000.
There is no limit on how much you can withdraw from your TFSA at one time. The amount you withdraw, along with any interest earned from investments, is not considered income—meaning it’s not taxed.
However, when you make contributions to your TFSA, you do not get the benefit of a tax deduction as you would with an RRSP.
Even if you already have an RRSP, you can also contribute to a TFSA to help you save up for retirement.
“When included as part of the retirement plan, the TFSA is an important account because it allows for better income layering when a member retires,” says David.
“You can implement an income strategy that draws from all retirement accounts, including your RRSP, TFSA, Canada Pension Plan (CPP), and Old Age Security (OAS) payments.”
“This will allow you to navigate tax brackets and preserve income-tested government benefits.”
Need help with your retirement planning? You can book a meeting with a Cambrian Advisor to get started. We’ll help you navigate the nuances of retirement planning.
Not sure how much TFSA contribution room you have? To check how much room you have, log into your CRA My Account.
Once you’ve logged into your account, you can view how much TFSA contribution room you have left for the year. Alternatively, you can call the CRA directly to speak with a representative.
Remember, you get more contribution room at the start of each year—so be sure to use it!
One of the main benefits of a TFSA is that you don’t pay taxes when you withdraw your money. This is different from an RRSP, where you pay taxes upon withdrawal.
To pull money out of your TFSA, you’ll need to contact the financial institution you opened your account with.
Perhaps the only downside of a TFSA is that you can only contribute so much to your account each year. Any overcontributions will be penalized by the CRA.
Before you contribute, be sure to check how much room you have left in your TFSA for the year.
Both RRSPs and TFSAs are savings vehicles. But with a TFSA, you can save up for purposes other than retirement. You can also access TFSA funds at any time without paying taxes on the withdrawal.
RRSPs are exclusively for retirement savings. If you take money out of your RRSP before retirement, you’ll pay a withholding tax that varies based on the amount you take out (unless you withdraw it through the Home Buyers’ Plan).
Which one makes the most sense for your financial situation? That varies based on how you plan to use the money.
For example, you might expect to be in a higher tax bracket in the future, and you need the tax-free benefits a TFSA presents.
Or maybe you’ve topped out on your RRSP, and you’re looking for another savings vehicle that doesn’t get taxed when you withdraw money.
At Cambrian, we can help you choose a registered savings plan that’s right for you.
TFSA
Minimum age to contribute: 18
Age limit on contributions: No limit
Contribution limit for 2024: $7,000
Are your contributions limited based on your income? No
Can you carry forward unused contribution room? Yes
If you withdraw money, does the contribution room get replaced? Yes
Do you get a tax deduction for contributions? No
Do you pay taxes on any income generated by investments? No
Do you pay tax on withdrawals? No
Does it have an impact on government benefits (OAS, GIS)? No
RRSP
Minimum age: No minimum age
Age limit on contributions: You can contribute up to the year of your 71st birthday
Contribution limit for 2024: Up to $31,560 or 18% of your earned income
Are your contributions limited based on your income? Yes
Can you carry forward unused contribution room? Yes
If you withdraw money, does the contribution room get replaced? No
Do you get a tax deduction for contributions? Yes
Do you pay taxes on any income generated by investments? Yes, upon withdrawal
Do you pay tax on withdrawals? Yes
Does it have an impact on government benefits (OAS, GIS)? Yes
Still deciding whether a TFSA or RRSP (or a combination of both) is right for you? It may depend on whether you need easy access to your funds with a TFSA or the immediate tax deduction from an RRSP.
“At Cambrian, we strive to deliver on our investment philosophy, which includes helping members understand what they own and why they own it,” says David.
Let’s put together a wealth management plan that helps you achieve your financial goals. To open your TFSA or talk about your options, book a meeting today!
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
It takes less than 5 minutes to make an appointment or to apply online. It is up to you how you want to meet your advisor - you will have the option to meet your advisor:
